Standard Metrics for Identification and Assessment of IRRBB

Paul Newson

This chapter introduces the principal methods by which IRRBB is typically measured and thus controlled by banks. These methods fall into two main families: value measures and income measures. Each will be described here in turn, together with their main strengths and weaknesses in a banking book context. It will also be shown that, in certain and very particular circumstances, they will produce equivalent results, but that these circumstances are unlikely to be found in a typical banking book. The various numerical examples have been designed to be as simple and as self-explanatory as possible, but it is assumed that the reader is fully conversant with DCF – if not, prior reference should be made to the first section of Chapter 2.

THE RE-PRICING GAP

The interest rate re-pricing gap is one of the principal tools used in the measurement of IRRBB, and is the starting point for most of the various value metrics commonly used in banks.

Basic construction

An interest rate gap report is essentially a two-dimensional grid, or matrix, at a particular date and which summarises all the current positions of the bank by: the remaining time to the their next re-pricing date (usually